Financial watchdogs welcome compensation move

IRELAND’s financial watchdogs have broadly welcomed new EU proposals aimed at improving the flow of compensation and enhancing customer security should banks fail.

The draft directive, from the EU, proposes an increase in compensation value to customers – through a harmonised deposit guarantee scheme, not too dissimilar to Ireland’s current model – who suffer losses due to fraud or bank failure, and a quicker delivery time.

Addressing yesterday’s sitting of the Joint Oireachtas Committee on European Scrutiny, Central Bank official Paul Molumby said that the directive is to be welcomed and offers confidence that deposit guarantee schemes can assist in maintaining financial stability.

Also addressing the Committee, Anne Troy of the Investor Compensation Company Ltd (ICCL) welcomed the proposals too; but pointed out that the increase in maximum compensation from the present Irish level of €20,000 per claimant to €50,000 will have an impact on the funding of the entire scheme.

This was also alluded to by Eimer O’Rourke of the Irish Banking Federation (IBF) – who welcomed the harmonised nature of the new proposal, but said that €50,000 could be too high a maximum payment, as around 95% of claimants would be fully compensated within the existing €20,000 ceiling.

In order to fund the enhanced guarantee scheme, banks will have to change from providing the equivalent of 0.2% of their total deposits to a system where they give 1.5% of eligible deposits each year for the next decade.

When asked if they thought this would provide a serious challenge to Irish banks, Central Bank officials declined to comment, saying it was a matter for the individual institutions to answer.

“The draft directive proposes an obligation to establish a mutual borrowing facility between deposit guarantee schemes. The Central Bank believes this is worthy of consideration,” added Mr Molumby.